Mitras Analysis of News : 24-05-2017

Print Friendly, PDF & Email
  1. Continental ties – India’s outreach to Africa (The Hindu)
  1. The hazards of farm loan waivers (Live Mint)
  1. Maharaja of debt: Air India (The Hindu)

 

Continental ties – India’s outreach to Africa (The Hindu)

 Synoptic line: It throws light on ongoing annual meetings of African Development Bank (AFDB) in Gujarat. (GS paper III)

Overview

  • India’s relations with African countries are surging ahead in the political, economic and multilateral spheres. Africa and Asia have a long history of politico- economic relations and the scale and pace of trade and investment flows has been growing in recent times.
  • This reflects India’s recognition of the economic and political transformation of Africa in the recent years. Africa is also critical to India’s security, especially the Horn of Africa region, because of its proximity with India.
  • India is the fifth largest country investing in the continent, with investments over the past 26 years amounting to around $54 billion. Having established its credentials and commitment over time, India is now taking its partnership beyond dollars and cents to a new strategic level.
  • The African Development Bank’s decision to hold its annual general meeting in India is a signal of the importance African countries attach to New Delhi’s growing role in its development. It is scheduled to be held from May 22 to 26 in Gujarat.

AfDB meeting 2017

  • India joined the African Development Bank (AfDB) in 1983, but this is the first time, it is hosting the annual meetings of the AfDB and its sister institutions, including of finance ministers of member countries.
  • The Annual Meetings provide a unique forum for representatives of government, business, civil society, think-tanks, academia and the media from Africa and beyond to debate key issues on Africa’s development, and to discuss the Bank’s performance in delivering on its mandate.
  • Reflecting the significance of agriculture in Africa and in the Bank’s development work, the 2017 Annual Meetings will be held on the theme: “Transforming Agriculture for Wealth Creation in Africa.”
  • Agriculture has a central place in the United Nations Sustainable Development Goals (SDGs) and the African Union’s Agenda 2063, both of which focus on poverty reduction, overcoming hunger and food insecurity. The potential of the agricultural sector in Africa and the need to bridge the gap on food supply is itself a compelling business case for private sector investment.
  • AfDB has adopted a strategy called “High 5s”, which focuses on 5 major developmental priorities comprising agriculture, energy, industrialisation, regional connectivity, and improved quality of life through access to social and economic opportunities.
  • The AfDB meet is in sync with India’s recognition as an important source of investment for projects in Africa across sectors such as pharmaceuticals, IT and telecommunications, engineering, education, health. Indian industry, led by FICCI, has established strong footprints in Africa through initiatives like ‘Namaskar Africa’, a flagship programme showcasing Indian strengths across diverse sectors to facilitate Africa’s move towards a more open–market economy.
  • The purpose of these events is primarily to reinforce our shared commitment, and further strengthen our cooperation framework with Africa. Given the perfect alignment between Bank’s development priorities and India’s growth experience and engagement with Africa, there is tremendous potential for collaboration.

Recent African- India

  • Recently India-Africa Forum Summit held in New Delhi in 2015, which have been attended by 40 African heads of state or government and representatives of all 54 countries from the continent.
  • India’s partnership with Africa is based on a model of cooperation, which is responsive to the needs of African countries. It is demand-driven and free of conditions.
  • Trade between Africa and India has multiplied in the last 15 years. It has doubled in the last five years to reach nearly $72 billion in 2014-15. India’s commodity trade with Africa in 2015-16 was higher than our commodity trade with the United States of America.
  • India’s private sector is also providing an impetus to stronger India-Africa ties, with Africa accounting for nearly one-fifth of Indian overseas direct investments between 1996 and 2016.
  • India is working on a maritime outreach to extend its Sagarmala programme to the southern coastal African countries with ‘blue economies’ or ‘Ocean economy’, which is aimed at development of marine resources sustainablyfor the growth and development of countries like India, on the African coast and other littoral states with coastlines.
  • Africa is crucial to the India-fostered International Solar Alliance (ISA). Over a dozen of the ISA’s 24 members are from Africa, the continental powerhouse of solar energy.
  • There are huge avenues of collaboration between the private sectors in India, Japan and Africa for specific joint projects in training and capacity building, health and infrastructure and a proposed “Asia-Africa Growth Corridor” to connect India and Africa through port development and linkages to the Delhi-Mumbai Industrial Corridor. 

India–Africa Forum Summit 2015

  • The third India-Africa Forum Summit held in 2015, has brought the leaders and representatives of all 54 countries of the dynamic African countries to New Delhi for first time in a landmark summit meeting that is set to upscale and transform the multi-faceted India-Africa partnership.
  • This was by far the biggest gathering of African leaders on the Indian soil and showcased multiple dimensions of the India-Africa relationship that is pivoted around trade, training, technology, capacity building and development partnership.
  • In a clear reaffirmation of their unstinting commitment to building lasting partnerships with India, 41 countries were represented at the level of heads of state government.
  • The architecture of the India-Africa engagement is evolving, with the two sides relating at three levels, namely bilateral, Regional Economic Communities (RECs) and the African Union.
  • The ‘Delhi Declaration’ of 2015 envisages the India-Africa partnership in development. On the same lines, India would be providing a credit of $10 billion to Africa for development projects along with a grant assistance of $600 million.
  • This grant includes development fund, health fund and scholarship for students in India. The Indian Technical and Economic Cooperation (ITEC) programme has already laid base for knowledge sharing and has acted as a bridge to connect students from both the sides. It is in sync with the ‘Africa’s Vision 2063’ which also focuses on growth, stability and prosperity.

Way ahead

  • India-Africa partnership provides limitless possibilities. If India is the bright spot in the world’s economy, Africa is also not far behind. The recent collaboration is signaling a more constructive approach towards African countries.
  • At a time when China is showcasing its Belt and Road Initiative as the “project of the century” and also bolstering its position as Africa’s largest donor, a coalition of like-minded countries such as the one India is putting together could provide an effective way to ensure more equitable and transparent development aid to Africa.

Question: Aspiring Africa and Emerging India holds a lot of opportunity for regional development and growth. Discuss.

The hazards of farm loan waivers (Live Mint)

 Synoptic line: It throws light on the menace of farm loan waivers on the agriculture sector. (GS paper III)

Overview

  • Even though agriculture contributes about 15% to India’s gross domestic product, a majority of the population directly or indirectly depends on the sector for livelihood. But are farm loan waivers the right way of addressing the problems in Indian agriculture?
  • It might make political sense in the short run farmers are a sizeable and powerful vote base but, as experience shows, it is unlikely to help the agriculture sector in the long run.

Problems with farm loan waivers

  • The current scenario is depressing; the crisis in agriculture has not just persisted but has become more acute. Various surveys and agricultural censuses reveal that there is excessive pressure on land, with unabated fragmentation leading to decreasing sizes of average landholdings. Costs of inputs are increasing, along with the reduction in the prices of agricultural produce in real terms. Climate change is leading to frequent crop failures and farming is becoming a loss-incurring business.
  • Intervention in the credit market through household debt relief has been a fiscal policy adopted by many governments both at the Central and state level for many years.
  • The support for debt-waiver programmes comes from the theoretical argument that a high level of outstanding debt reduces the incentive for the debtor to exert effort to repay. In such a situation, a policy of debt forgiveness could induce the optimal level of effort from the debtor and maximize repayment.
  • However, repeated debt-waiver programmes might alter the expectations of debtors about enforcement of future credit contracts. This, in turn, could adversely affect the level of effort.
  • Past empirical research analysing the 2008 nationwide Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) found that it led to a delay in loan repayment, increase in defaults, and no significant productivity gains.
  • In spite of the evidence against the effectiveness of the ADWDRS programme, many states continue to announce their own state-level debt-waiver schemes.

Implication for loan waivers

  • Research provides evidence that a blanket waiver scheme is detrimental to the development of credit markets. Repeated debt-waiver programmes distort households’ incentive structures, away from productive investments and towards unproductive consumption and wilful defaults.
  • These wilful defaults, in turn, are likely to disrupt the functioning of the entire credit system. It is important to note, however, that findings do not speak completely against debt-waiver programmes altogether.
  • Rather, they warn against implementation of loan-waiver programmes based on simplistic eligibility rules that do not account for the actual needs of the farmers and the agricultural shocks they have faced.

Way ahead

  • Government has the right ideas; it has launched a new crop insurance scheme and also sought to create a National Agricultural Market, but the first is still skewed towards protecting banks that provide agricultural loans than farmers, and the second is still in its infancy.
  • Just around one in four farmers has protection, and the various national agricultural markets are yet to be linked (which means all trading happens within each, and not across), and powerful trader lobbies have ensured that important commodities (so-called bulk ones) do not get traded on them. Still, with some tweaking, both could provide at least a partial answer to the ongoing agrarian crisis.
  • Moreover, a well-designed loan-waiver programme could enhance the overall well-being of the households by improving their productive investments, as opposed to distorting their loan utilization and repayment patterns. One possibility is to formulate eligibility rules that depend on historical loan-utilization, investment, and repayment patterns.
  • Another option is to explore alternative policy interventions like agricultural insurance. The desired intervention could then be the one, which nudges households into investing more now and increase long-term productivity.

Question: What reforms should be initiated to make Agriculture a sustainable yet profitable activity?

Maharaja of debt: Air India (The Hindu)

 Synoptic line: It throws light on the problems plaguing the Air India and whether it is feasible to revive aviation giant. (GS paper III)

Overview

  • The Comptroller and Auditor General of India ( CAG) pointed out numerous holes in the government version that state-owned Air India is on a path to turnaround its fortunes. In its audit of the Turnaround Plan and Financial Restructuring Plan of the airline, the auditor said that the airline has failed to achieve many of the objectives in various functional areas mandated under the financial restructuring plan.

Reasons for low profitability

  1. Less income in passenger revenue:Air India earned passenger revenue of Rs 15,773 crore, almost 20% lower than projected Rs 21,297 crore in FY16. The failure to meet the target was despite meeting load factor targets. So that means that airline lost revenue due to its own inefficiency like lack of aircraft availability, faulty deployment, low utilisation of human resources and lack of ancillary revenue.
  1. Low monetisation of assets:Lack or faulty initiatives to monetise its assets- one of the primary requirement of meeting the revenue deficiency led to dip in the company’s fortunes. The audit noticed that for five out of 12 properties the terms and conditions made it impossible to monetize. The turnaround plans envisaged that Rs 500 crore will be earned from monetization of 12 properties but Air India till February 2016 has marked only six.
  1. Non-availability of proper aircraft:The audit finds that there has been a mismatch in demand and availability of the airline. For instance, there was over provisioning of wide body aircraft where as it didn’t have required number of narrow body aircraft. For instance, the airline after the recommendation by the consultant to buy induct A320 aircraft to reduce maintenance cost, it took three years for the airline to float a global tender. Such long delays points to the inefficiency of the procurement process given the urgency of the requirement,” the audit report said.
  1. Loss making international operations:Air India can be on an expansion drive to new international destinations but the audit says that most of such routes burn a hole in the airline’s pocket as it fails to recover the cost. For instance flights to North America and Europe results in a loss of Rs 2,323.76 crore in 2015-16. In the Delhi-NewYork-Delhi route the occupancy stands at 77% as Air India faces completion from from other airlines.
  1. Mismanagement of manpower:According to the requirement, the company had 11,433 employees as against the envisaged requirement of 7,245. In addition, there was under utilisation of of pilots and cabin crews led to loss for the airline.

Analysis

  • The issue of whether the airline has a future has been frequently posed, but the question has a certain edge after the introduction and growth of private airlines.
  • The government is working on a plan to improve the airline’s financial position, corporate governance, and management. But the main problems that beset Air India are structural, which is why efforts to revive the entity are unlikely to bear fruit.
  • The airline has failed time and again to prove that it can generate sustainable profits. It recorded an operating profit after almost a decade in fiscal 2015-16, thanks mainly to a fall in oil prices, but still ended the year with a net loss. These losses have been mainly owing to a slew of operational inefficiencies, including a bloated workforce.
  • It is doubtful whether these issues can be adequately addressed unless there is a change in ownership. Traditionally, public ownership has left the carrier’s management subservient to the interests of the political class, while taxpayers funding the airline’s operations have been left holding the short end of the stick.
  • Years of consecutive losses have also ruined Air India’s overall financial position, pushing the airline into a debt trap.

Way ahead

  • Air India’s debt burden is the product of bureaucratic mismanagement over several years. Any financial bailout that does not address this fundamental problem would mean throwing good money after bad. This would be sinful in an age where profitable private airlines can easily fill any vacuum left in the market by Air India’s exit.
  • Private buyers are unlikely to come forward to buy Air India, as its debt load easily eats up any operating profit. In that case the government can either force public sector lenders to incur more losses, or use public funds to pay them out.

Question What are the implications of infusing more liquidity in Air India. Will it revive the national carrier on the lines Emirates and Lufthansa?

Previous Post
Next Post

admin